Each year, Warren Buffett writes an open letter to Berkshire Hathaway shareholders. In this post, we have summarised the key learnings from the letter written in 1977, to save you the time from reading the whole letter (although still strongly recommend).
Berkshire Hathaway – 1977 Learnings
Buffett: Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding. Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.
MoneyWiseSmart (MWS): Do you focus on ROE, or just earnings growth?
Buffett: Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks.
MWS: Do you check prices often? Why?
Buffett: It is comforting to be in a business [the insurance business] where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned – and, unfortunately, sometimes re-learned – is the importance of being in businesses where tailwinds prevail rather than headwinds.
MWS: Do your businesses have tailwind or headwind?
Buffett: We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.
MWS: What’s your investment process? Do you have one? Is the business simple and within your circle of competence?
Berkshire Hathaway 1977 Letter: Key Investment Lessons and Insights
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Check out other investor letters here.
Source: Berkshire Hathaway letter.
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